Saving for College: A look at various options available

Saving for college is a very important piece of many families’ financial plan, and there are lots of resources and tools to help them do it. 529 plans are one of the most popular methods of saving for college that exist today. There are numerous reasons to use a 529, including tax deferred growth, flexibility to use for multiple children, and more. What many don’t realize is that there may be an even more advantageous plan out there: life insurance. 529 plans are effective, but they don’t account for the early death of a parent, as life insurance does. Read on as we compare life insurance and 529 plans.
Did you know that 529’s have major limitations? As the graphic shows, the 529 plan severely restricts the usage of the money. Fraternity dues, gym memberships, transportation costs to and from school, the phone or tablet they may need, and even the costs of living off campus – all of these are non eligible expenses under a 529 plan. That means if you want to use the money for any of these purposes, you will be taxed plus pay a 10% penalty on the withdrawal. 
Life insurance on the other hand allows you to use the money for any purpose you want. You can take a loan from your policy tax free, and use it for any purpose you choose, not just educational expenses. Policy values can be used for off campus housing, household repairs, financial emergencies, and more – all tax free (so long as the policy remains in force). Let’s take a look at how a life insurance policy is structured.
To begin with, let’s review the different features of permanent life insurance. Permanent life insurance has two components: a (generally) tax-free death benefit, and a cash account. The cash account grows tax free for the life of the contract. This cash value can be accessed via a loan for virtually any use imaginable. Generally speaking, the cash value growth in a life insurance contract, depending on the type of policy, either relies on the profits of the insurance company (whole life), or one of the stock market indices’ returns (Indexed Universal Life, or IUL for short). When done early enough and properly structured, life insurance can provide stable tax free gains that will allow your cash values to grow to be able to be used for college funding (or any other purposes). See the chart  below for a comparison between life insurance and a 529 plan.
As you can see, life insurance provides a great amount of flexibility! Let’s look at an example of how a life insurance policy could be used for college funding. John and Elizabeth are both 32, and have a 2 year old son, Mike, that they want to provide college funding for. Their parents also want to provide some additional help, and between the three families, they determined that  they would like to put $1,000 a month into either a 529 or a life insurance contract. After reviewing their options, they decided to go with the more flexible life insurance policy for their son’s college funding. See below for an example of the projected policy values, along with what else the money could be used for!
This example was clearly helped by the amount of early funding, and the health of John, but it shows the importance of proper planning for your children at an early age. This example shows the flexibility that John had. The down payment and the retirement income would have both been taxed plus a 10% penalty had John invested in the 529 plan instead!
The bottom line is that if you have a young child and are interested in saving for college, or you have a grandchild that you are interested in helping, come see us – we will go over the ins and outs of each plan and let you choose the best option for your situation.